The European Central Bank has launched a scathing critique of leading cryptocurrency Bitcoin, saying it appears to not be suitable as a payment method and that financial institutions should “be wary” of the long-term damage promoting it could cause. Bitcoin’s notoriously volatile valuation has stabilised in recent months, but the bank describes this as an “artificially induced last gasp before the road to irrelevance” rather than an indicator the currency is about to hit new heights.
Criticism from the ECB comes at a time of widespread chaos in the crypto markets following the collapse of leading crypto exchange FTX amid allegations that funds have been misappropriated. This week crypto lender BlockFi became the latest industry big name to file for bankruptcy.
Bitcoin is a ‘questionable’ payment method – ECB
The blog post from Ulrich Bindseil, the ECB’s director general for market infrastructure and payments, and adviser Jürgen Schaff, highlights a range of Bitcoin problems.
It questions the currency’s applicability as a payment method. “Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment,” the pair write. “Real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions.”
Similarly, they believe it also fails to add up as a reliable investment. “It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold),” Bindseil and Schaff write. “The market valuation of Bitcoin is therefore based purely on speculation.”
Investors are maintaining a “speculative bubble” around Bitcoin investments, the pair argue. “Speculative bubbles rely on new money flowing in,” they say. “Bitcoin has also repeatedly benefited from waves of new investors. The manipulations by individual exchanges or stablecoin providers. during the first waves are well documented, but less so the stabilising factors after the supposed bursting of the bubble in spring.
“Big Bitcoin investors have the strongest incentives to keep the euphoria going. At the end of 2020, isolated companies began to promote Bitcoin at corporate expense. Some venture capital firms are also still investing heavily.”
Countries such as the UK and the US, as well as organisations such as the European Union, are looking at ways to regulate Bitcoin and other cryptocurrencies. But these moves could be counterproductive, giving the impression it can be considered as a normal asset class by businesses and consumers, the ECB duo say. “The supposed sanction of regulation has also tempted the conventional financial industry to make it easier for customers to access Bitcoin,” they write. “This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin are sound.”
Bitcoin problems could hinder its prospects
Bitcoin’s value dropped sharply earlier this year during the so-called crypto crash, which saw stablecoin Terra collapse. It then remained largely stable for months until FTX’s demise saw it dip again.
Bindseil and Schaff write: “For Bitcoin proponents, the seeming stabilisation signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance.”
They point out that Bitcoin is an “unprecedented” polluter thanks to its proof-of-work generation method, which requires large amounts of compute power and energy, and generates a lot of e-waste as machines as used and discarded quickly.
“Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised,” they conclude. “Similarly, the financial industry should be wary of the long-term damage of promoting Bitcoin investments – despite short-term profits they could make (even without their skin in the game). The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.”
Read more: Can crypto save the planet?
